Economics and Economic Justice

First published Fri May 28, 2004; substantive revision Wed May 30, 2012

Distributive justice is often considered not to belong to the scope of
economics, but there is actually an important literature in economics
that addresses normative issues in social and economic justice. A
variety of economic theories and approaches provide many insights in
these matters. Presented below are the theory of inequality and
poverty measurement, welfare economics, the theory of social choice,
the theory of bargaining and of cooperative games, and the theory of
fair allocation. There has been a good deal of cross-fertilization
between these different branches of normative economics and
philosophical theories of justice, and many examples of such mutual
influences are exhibited in this article.

The role of ethics in economic theorizing is still a debated issue. In
spite of the reluctance of many economists to view normative issues as
part and parcel of their discipline, normative economics now
represents an impressive body of literature. One may, however, wonder
if normative economics cannot also be considered a part of political
philosophy.

In the first half of the twentieth century, most leading economists
(Pigou, Hicks, Kaldor, Samuelson, Arrow etc.) devoted a significant
part of their research effort to normative issues, notably the
definition of criteria for the evaluation of public policies. The
situation is very different nowadays. “Economists do not devote a
great deal of time to investigating the values on which their analyses
are based. Welfare economics is not a subject which every present-day
student of economics is expected to study”, writes Atkinson
(2001, p. 195), who regrets “the strange disappearance of welfare
economics”. Normative economics itself may be partly guilty for this
state of affairs, in view of its repeated failure to provide
conclusive results and its long-lasting focus on impossibility
theorems (see
§ 4.1).
But there has also been a persistent ambiguity about the status of
normative propositions in economics. The subject matter of economics
and its close relation to policy advice make it virtually impossible
to avoid mingling with value judgments. Nonetheless, the desire to
separate positive statements from normative statements has often been
transformed into the illusion that economics could be a science only
by shunning the latter. Robbins (1932) has been influential in this
positivist move, in spite of a late clarification (Robbins 1981) that
his intention was not to disparage normative issues, but only to
clarify the normative status of (useful and necessary) interpersonal
comparisons of welfare. It is worth emphasizing that many results in
normative economics are mathematical theorems with a primary
analytical function. Endowing them with a normative content may be
confusing, because they are most useful in clarifying ethical values
and do not imply by themselves that these values must be endorsed. “It
is a legitimate exercise of economic analysis to examine the
consequences of various value judgments, whether or not they are
shared by the theorist.” (Samuelson 1947, p. 220) The role of ethical
judgments in economics has received recent and valuable scrutiny in
Sen (1987), Hausman and McPherson (1996) and Mongin (2001b).

There have been many mutual influences between normative economics and
political philosophy. In particular, Rawls' difference principle
(Rawls 1971) has been instrumental in making economic analysis of
redistributive policies pay some attention to the maximin criterion,
which puts absolute priority on the worst-off, and not only to
sum-utilitarianism. (It has taken more time for economists to realize
that Rawls' difference principle applies to primary goods, not
utilities.) Conversely, many concepts used by political philosophers
come from various branches of normative economics (see below).

There are, however, differences in focus and in methodology. Political
philosophy tends to focus on the general issue of social justice,
whereas normative economics also covers microeconomic issues of
resource allocation and the evaluation of public policies in an unjust
society. Political philosophy focuses on arguments and basic
principles, whereas normative economics is more concerned with the
effective ranking of social states than the arguments underlying a
given ranking. The difference is thin in this respect, since the
axiomatic analysis in normative economics may be interpreted as
performing not only a logical decomposition of a given ranking or
principle, but also a clarification of the underlying basic principles
or arguments. But consider for instance the “leveling-down objection”
(Parfit 1995), which states that egalitarianism is wrong because it
considers that there is something good in achieving equality
by leveling down (even when the egalitarian ranking says that, all
things considered, leveling down is bad). This kind of argument
has to do with the reasons underlying a social judgment, not with the
content of the all things considered judgment itself. It is hard to
imagine if and how the leveling-down objection could be incorporated
in the models of normative economics. A final difference between
normative economics and political philosophy, indeed, lies in
conceptual tools. Normative economics uses the formal apparatus of
economics, which gives powerful means to derive non-intuitive
conclusions from simple arguments, although it also deprives the
analyst of the possibility of exploring issues that are hard to
formalize.

There are now several general surveys of normative economics, some of
which do also cover the intersection with political philosophy: Arrow,
Sen and Suzumura (1997, 2002, 2011), Fleurbaey (1996), Hausman and McPherson
(2006), Kolm (1996), Moulin (1988, 1995, 1998), Roemer (1996), Young
(1994).

Although the development of the theory of inequality and poverty
measurement is fairly recent, it makes sense to present it in first
position, because it focuses on the simplest context of evaluation of
social situations, namely, the context in which there is a well-defined
measure of individual situations, amenable to all kinds of
interpersonal comparisons. The traditional focus of this theory on
income inequality is the reason for this rather optimistic assumption
about the evaluation of individual well-being. A good deal of the rest
of normative economics may be seen as devoted to grappling with the
difficulties due to the recognition that individual well-being is
primarily multi-dimensional and not easily synthesized in a single
measure.

The study of inequality and poverty indices started from a
statistical, pragmatic perspective, with such indices as the Gini
index of inequality or the poverty head count. Recent research has
provided two valuable insights. First, it is possible to relate
inequality indices to social welfare functions, so as to give
inequality indices a more transparent ethical content. The idea is
that an inequality index should not simply measure dispersion in a
descriptive way, but would gain in relevance if it measured the harm
to social welfare done by inequality. There is a simple method to
derive an inequality index from a social welfare function, due to Kolm
(1969) and popularized by Atkinson (1970), Sen (1973). Consider a
social welfare function which is defined on distributions of income
and is symmetrical (i.e., permuting the income of two individuals
leaves social welfare unchanged). For any given unequal distribution
of income, one may compute the egalitarian distribution of income
which would yield the same social welfare as the unequal
distribution. This is called the “equally-distributed equivalent” (or “equal-equivalent”) distribution. If
the social welfare function is averse to inequality, the total amount
of income in the equal-equivalent distribution is less than in the
unequal distribution. In other words, the social welfare function
condones some sacrifice of total income in order to reach
equality. This drop in income, measured in proportion of the initial
total income, may serve as a valuable index of inequality. This index
may also be used in a picturesque decomposition of social
welfare. Indeed, an ordinally equivalent measure of social welfare is
then total income (or average income – it does not matter when
the population is fixed) times one minus the inequality index.

This method of construction of an index of inequality, often referred
to as the ethical approach to inequality measurement, is most
useful when the argument of the social welfare function, and the
object of the measurement of inequality, is the distribution of
individual well-being (which may or may not be measured by
income). Then the social welfare function is indeed symmetrical (by
requirement of impartiality) and its aversion to inequality reflects
its underlying ethical principles. In other contexts, the method is
more problematic. Consider the case when social welfare depends on
individual well-being, and individual well-being depends on income
with some individual variability due to differential needs. Then
income equality may no longer be a valuable goal, because the needy
individuals may need more income than others. Using this method to
construct an index of inequality of well-being is fine, but
using it to construct an index of inequality of incomes would
be strange, although it would immediately reveal that income
inequality is not always bad (when it compensates for unequal
needs). Now consider the case when social welfare is the utilitarian
sum of individual utilities, and all individuals have the same
strictly concave utility function (strict concavity means that it
displays a decreasing marginal utility). Then using this method to
construct an index of income inequality is amenable to a different
interpretation. The index then does not reflect a principled aversion
to inequality in the social welfare function, since the social welfare
function has no aversion to inequality of utilities. It only reflects
the consequence of an empirical fact, the degree of concavity of
individual utility functions. To call this the ethical approach, in
this context, seems a misnomer.

The second valuable contribution of recent research in this field is
the development of an alternative ethical approach through the
axiomatic study of the properties of indices. The main ethical axioms
deal with transfers. The Pigou-Dalton principle of transfers says that
inequality decreases (or social welfare increases) when an even
transfer is made from a richer to a poorer individual without
reversing their pairwise ranking (although this may alter their
ranking relative to other individuals). Since this condition is about
even transfers, it is quite weak and other axioms have been proposed
in order to strengthen the priority of the worst-off. The principle of
diminishing transfers (Kolm 1976) says that a Pigou-Dalton transfer
has a greater impact the lower it occurs in the distribution. The
principle of proportional transfers (Fleurbaey and Michel 2001) says
that an inefficient transfer in which what the donor gives and what
the beneficiary receives is proportional to their initial positions
increases social welfare. Similar transfer axioms have been adapted to
the measurement of poverty. For instance, Sen (1976) proposed the
condition saying that poverty increases when an even transfer is made
from someone who is below the poverty line to a richer individual
(below or above the line). The other axioms with which the axiomatic
analysis has been made usually have a less obvious ethical appeal, and
relate to decomposability of indices, scale invariance and the like.
Characterization results have been obtained, which identify classes of
indices satisfying particular lists of axioms. The two ethical
approaches may be combined, when one takes as an axiom the condition
that the index be derived from a social welfare function with
particular features.

The multiplicity of indices, even when a restriction to special
sub-classes may be justified by axiomatic characterization, raises a
serious problem for applications. How can one make sure that a
distribution is more or less unequal, or has more or less poverty,
than another without checking an infinite number of indices? Although
this may look like a purely practical issue, it has given rise to a
broad range of deep results, relating the statistical concept of
stochastic dominance to general properties of social welfare functions
and to the satisfaction of transfer axioms by inequality and poverty
indices. This approach, in particular, justifies the widespread use of
Lorenz curves in the empirical studies of inequality. The Lorenz curve
depicts the percentage of the total amount of whatever is measured,
income, wealth or well-being, possessed by any given percentage of the
poorest among the population. For instance, according to the Census
Bureau, in 2006 the poorest 20%'s share of total income was 3.7%, the
poorest 40%'s share was 13.1%, the poorest 60%'s share was 28.1%,
the poorest 80%'s share was 50.6%, while the top 5%'s share was 22.2%. This indicates that the Lorenz
curve is approximately as in the following figure.

Philosophical interest in the measurement of inequality has recently
risen (Temkin 1993). Most of this philosophical literature, however,
tends to focus on defining the right foundations for an aversion to
inequality. In particular, Parfit (1995) proposes to give priority to
the worse-off not because of their relative position compared to the
better-off, but because and to the extent that they are badly
off. This probably corresponds to defining social welfare by an
additively separable social welfare function, with diminishing
marginal social utility (a social welfare function is additively
separable when it is the sum of separate terms, each of which depends
only on one individual's well-being). Interestingly, if egalitarianism
is defined in opposition to this “priority view” by the feature that
it relies on judgments of relative positions, this means that
egalitarian values cannot be correctly represented by a separable
social welfare function. This seems to raise the ethical stakes
concerning properties of decomposability of indices or separability of
social welfare functions, which are usually considered in economics
merely as convenient conditions simplifying the functional forms
(although separability may also be justified by the subsidiarity
principle, according to which unconcerned individuals need not have a
say in a decision). The content and importance of the distinction
between egalitarianism and prioritarianism remains a matter of debate
(see, among many others, Tungodden 2003,
and the contributions in Holtug and Lippert-Rasmussen 2007). It is also interesting to
notice that philosophers are often at ease to work with the notion of
social welfare (or social good, or inequality) as a numerical quantity
with cardinal meaning, whereas economists typically restrict their
interpretation of social welfare or inequality to a purely ordinal
ranking of social states. Beside egalitarian and prioritarian
positions one must also mention the “sufficiency view”, defended
e.g. by Frankfurt (1987) who argues that priority should be given only
to those below a certain threshold. One may consider that this view
supports the idea that poverty indices might summarize everything that
is relevant about social welfare.

Welfare economics is the traditional generic label of normative
economics, but, in spite of substantial variations between
authors, it now tends to be associated with a particular
subcontinent of this domain, maybe as a result of the development of
“non-welfarist” approaches and of approaches with a broader scope,
such as the theory of social choice.

Surveys on welfare economics in its restricted definition can be found
in Graff (1957), Boadway and Bruce (1984), Chipman and Moore (1978),
Samuelson (1981).

The proponents of a “new” welfare economics (Hicks, Kaldor, Scitovsky)
have distanced themselves from their predecessors (Marshall, Pigou,
Lerner) by abandoning the idea of making social welfare judgments on
the basis of interpersonal comparisons of utility. Their problem was
then that in absence of any kind of interpersonal comparisons, the
only principle on which to ground their judgments was the Pareto
principle, according to which a situation is a global improvement if
it is an improvement for every member of the concerned population
(there are variants of this principle depending on how individual
improvement is defined, in terms of preferences or some notion of
well-being, and depending on whether it is a strict improvement for
all members or some of them stay put). Since most changes due to
public policy hurt some subgroups for the benefit of others, the
Pareto principle remains generally silent. The need for a less
restrictive criterion of evaluation has led Kaldor (1939) and Hicks
(1939) to propose an extension of the Pareto principle through
compensation tests. According to Kaldor's criterion, a situation is a
global improvement if ex post the gainers could compensate the
losers. For Hicks' criterion, the condition is that ex ante the losers
could not compensate the gainers (a change from situation A to
situation B is approved by Hicks' criterion if the change from B to A
is not approved by Kaldor's criterion). These criteria are much less
partial than the Pareto principle, but they remain partial (that is,
they fail to rank many pairs of alternatives). This is not, however,
their main drawback. They have been criticized for two basic flaws.
First, for plausible definitions of how the compensation transfers
could be computed, these criteria may lead to inconsistent social
judgments: the same criterion may simultaneously declare that a
situation A is better than another situation B, and conversely.
Scitovsky (1941) has proposed to combine the two criteria, but this
does not prevent the occurrence of intransitive social judgments.
Second, the compensation tests have a dubious ethical value. If the
compensatory transfers are performed in Kaldor's criterion, then the
Pareto criterion alone suffices since after compensation everybody
gains. If the compensatory transfers are not performed, the losers
remain losers and the mere possibility of compensation is a meager
consolation to them. Such criteria are then typically biased in favor
of the rich whose willingness to pay is generally high (i.e., they are
willing to give a lot in order to obtain whatever they want, and
therefore they can easily compensate the losers; when they do not
actually pay the compensation, they can have the cake and eat it
too).

Cost-benefit analysis has more recently developed criteria which are
very similar and rely on the summation of willingness to pay across
the population. In spite of repeated criticism by specialists (Arrow
1951, Boadway and Bruce 1984, Sen 1979, Blackorby and Donaldson 1990),
practitioners of cost-benefit analysis and some branches of economic
theory (industrial organization, international economics) still
commonly rely on such criteria. More sophisticated variants of
cost-benefit analysis (Layard and Glaister 1994, Drèze and
Stern 1987) avoid these problems by relying on weighted sums of
willingness to pay or even on consistent social welfare
functions. Adler (2012) offers a comprehensive study of the
foundations of the social welfare function approach to cost-benefit
analysis. Many specialists of public economics (e.g. Stiglitz 1987)
have considered that the Pareto criterion was the core ethical
principle on which economists should buttress their social
evaluations, denouncing all sources of inefficiency in social
organizations and public policies.

A subfield of welfare economics focused on the possibility of making
social welfare judgments on the basis of national income. An increase
in national income may reflect an increase in social welfare under
some stringent assumptions, most conspicuously the assumption that the
distribution of incomes is socially optimal. Although very
restrictive, this kind of result has a lasting influence, in theory
(international economics) and in practice (the salience of GDP growth
in policy discussions). There exists a school of social indicators
(see the Social Indicators Research journal) which fights
this influence and the number of alternative indicators (of happiness,
genuine progress, social health, economic well-being, etc.) has soared
in the last decades (see e.g. Miringoff and Miringoff 1999, Frey and
Stutzer 2002, Kahneman et al. 2004 and Gadrey and Jany-Catrice 2006).

Bergson (1938) and Samuelson (1947, 1981) occupy a special position,
which may be described as a third way between old and new welfare
economics. From the former, they retain the goal of making complete
and consistent social welfare judgments with the help of well-defined
social welfare functions. The formula
W(U1(x),…,Un(
x)) is often named a “Bergson-Samuelson social welfare function”
(x is the social state; Ui(x),
for i=1,…,n, is individual i's
utility in this state). With the latter, however, they share the idea
that only ordinal non-comparable information should be retained about
individual preferences. This may seem contradictory with the formula
of the Bergson-Samuelson social welfare function, in which individual
utility functions appear, and there has been a controversy about the
possibility of constructing a Bergson-Samuelson social welfare
function on the sole basis of individual ordinal non-comparable
preferences (see in particular Arrow (1951), Kemp and Ng (1976),
Samuelson (1977, 1987), Sen (1986) and a recent discussion in Fleurbaey and Mongin (2005)). Samuelson and his defenders are
commonly considered to have lost the contest, but it may also be
argued that their opponents have misunderstood them. Indeed,
individual utility functions in the
W(U1(x),…,Un(
x)) formula are, according to Bergson and Samuelson, to be
constructed out of individual preference orderings, on the basis of
fairness principles. The logical possibility of such a construction
has been repeatedly proven by Samuelson (1977), Pazner (1979), Mayston
(1974, 1982). The fact that such a construction does not require any
other information than ordinal non-comparable preferences is
indisputable. Bergson and Samuelson acknowledged the need for
interpersonal comparisons, but considered that these could be done, in
an ethically relevant way, on the sole basis of non-comparable
preference orderings. They failed, however, to be more specific about
the fairness principles on which the construction could be justified.
The theory of fair allocation (see
§ 6)
may fill the gap.

Harsanyi may be viewed as the last representative of the old welfare
economics, to which he made a major contribution in the form of two
arguments. The first one is often called the “impartial observer
argument”. An impartial observer should decide for society as if she
had an equal chance of becoming anyone in the considered
population. This is a risky situation in which the standard decision
criterion is expected utility. The computation of expected utility, in
this equal probability case, yields an arithmetic mean of the
utilities that the observer would have if she became anyone in the
population. Harsanyi (1953) considers this to be an argument in favor
of utilitarianism. The obvious weakness of the argument, however, is
that not all versions of utilitarianism would measure individual
utility in a way that may be entered in the computation of the
expected utility of the impartial observer. In other words, ask a
utilitarian to compute social welfare, and ask an impartial observer
to compute her expected utility. There is little reason to believe
that they will come up with similar conclusions, even though both
compute a sum or a mean. For instance, a very risk-averse impartial
observer may come arbitrarily close to the maximin criterion.

This argument has triggered controversies, in particular with Rawls
(1974), about the soundness of the maximin criterion in the original
position, and with Sen (1977b). See Harsanyi (1976) and recent
analyses in Weymark (1991), Mongin (2001a). There is a related, but
different controversy about the consequences of the veil of ignorance
in Dworkin's hypothetical insurance scheme (Dworkin 2000). Roemer
(1985) argues that if individuals maximize their expected utility on
the insurance market, they insure against states in which they have
low marginal utility. If low marginal utility happens to be the
consequence of some handicaps, then the hypothetical market will tax
the disabled for the benefit of the others, a paradoxical but typical
consequence of utilitarian policies. It is indeed well known that
insurance markets have strange consequences when utilities are
state-dependent (that is, when the utility of income is affected by
random events). For a recent revival of this controversy, see Dworkin
(2002), Fleurbaey (2008) and Roemer (2002a).

Harsanyi's second argument, the “aggregation theorem”, is about a
social planner who, facing risky prospects, maximizes expected social
welfare and wants to respect individual preferences about
prospects. Harsanyi (1955) shows that these two conditions imply that
social welfare must be a weighted sum of individual utilities, and
concludes that this is another argument in favor of utilitarianism.
Recent evaluation of this argument and its consequences may be found
in Broome (1991), Weymark (1991). In particular, Broome uses the
structure of this argument to conclude that social good must be
computed as the sum of individual goods, although this does not
preclude incorporating a good deal of inequality aversion in the
measurement of individual good. Diamond (1967) has raised a famous
objection against the idea that expected utility is a good criterion
for the social planner. This criterion implies that if the social
planner is indifferent between the distributions of utilities, for two
individuals, (1,0) and (0,1), then he must also be indifferent between
these two distributions and an equal probability of getting either
distribution. This is paradoxical, this lottery being ex ante better
since it gives equal prospects to individuals. Broome (1991) raises
another puzzle. An even better lottery would yield either (0,0) or
(1,1) with equal probability. It is better because ex ante it gives
individuals the same prospects as the previous lottery, and it is more
egalitarian ex post. The problem is that it seems quite hard to
construct a social criterion which ranks these four alternatives as
suggested here. Defining social welfare under uncertainty is still a
matter of bafflement. See Deschamps and Gevers (1979), Ben Porath,
Gilboa and Schmeidler (1997), Fleurbaey (2010). Things are even more difficult when
probabilities are subjective and individual beliefs may
differ. Harsanyi's aggregation theorem then transforms into an
impossibility theorem. On this, see e.g. Mongin (1995), Bradley (2005).

The theory of social choice originated in Arrow's failed attempt to
systematize the Bergson-Samuelson approach (see Arrow 1983, p.26). It
developed into an immense literature, with many ramifications to a
variety of subfields and topics. The social choice framework is,
potentially, so general that one may think of using it to unify
normative economics. In a restrictive definition, however, social
choice is considered to deal with the problem of synthesizing
heterogeneous individual preferences into a consistent ranking.
Sometimes an even more restrictive notion of “Arrovian social choice”
is used to name works which faithfully adopt Arrow's particular
axioms.

In an attempt to construct a consistent social ranking of a set of
alternatives on the basis of individual preferences over this set,
Arrow (1951) obtained: 1) an impossibility theorem; 2) a
generalization of the framework of welfare economics, covering all
collective decisions from political democracy and committee decisions
to market allocation; 3) an axiomatic method which set a standard of
rigor for any future endeavor.

The impossibility theorem roughly says that there is no general way to
rank a given set of (more than two) alternatives on the basis of (at
least two) individual preferences, if one wants to respect three
conditions: (Weak Pareto) unanimous preferences are always respected
(if everyone prefers A to B, then A is better than B); (Independence
of Irrelevant Alternatives) any subset of two alternatives must be
ranked on the sole basis of individual preferences over this subset;
(No-Dictatorship) no individual is a dictator in the sense that his
strict preferences are always obeyed by the ranking, no matter what
they and the other individuals' preferences are. The impossibility
holds when one wants to cover a great variety of possible profiles of
individual preferences. When there is sufficient homogeneity among
preferences, for instance when alternatives differ only in one
dimension and individual preferences are based on the distance of
alternatives to their preferred alternative along this dimension
(think, for instance, of political options on the left-right
spectrum), then consistent methods exist (the majority rule, in this
example; Black 1958).

Arrow's result clearly extends the scope of analysis beyond the
traditional focus of welfare economics, and nicely illuminates the
difficulties of democratic voting procedures such as the Condorcet
paradox (consisting of the fact that majority rule may be
intransitive). The analysis of voting procedures is wide domain. For
recent surveys, see e.g. Saari (2001) and Brams and Fishburn (2002).
This analysis reveals a deep tension between rules based on the
majority principle and rules which protect minorities by taking
account of preferences in a more extended way (see Pattanaik
2002).

Specialists of welfare economics once claimed that Arrow's result had
no bearing on economic allocation (e.g. Samuelson 1967), and there is
some ambiguity in Arrow (1951) about whether, in an economic context,
the best application of the theorem is about individual self-centered
tastes over personal consumptions, in which case it is indeed
relevant to welfare economics, or about individual ethical
values about general allocations. It is now generally
considered that the formal framework of social choice can sensibly be
applied to the Bergson-Samuelson problem of ranking allocations on the
basis of individual tastes. Applications of Arrow's theorem to various
economic contexts have been made (see the surveys by Le Breton 1997,
Le Breton and Weymark 2011).

Sen (1970a) proposes a further generalization of the social choice
framework, by permitting consideration of information about individual
utility functions, not only preferences. This enlargement is motivated
by the impossibility theorem, but also by the ethical relevance of
various kinds of data. Distributional issues obviously require
interpersonal comparisons of well-being. For instance, an egalitarian
evaluation of allocations needs a determination of who the worst-off
are. It is tempting to think of such comparisons in terms of
utilities. This has triggered an important body of literature which
has greatly clarified the meaning of various kinds of interpersonal
utility comparisons (of levels, differences, etc.) and the relation
between them and various social criteria (egalitarianism,
utilitarianism, etc.). This literature (esp. d'Aspremont and Gevers
1977) has also provided an important formal analysis of the concept of
welfarism, showing that it contains two subcomponents. The first one
is the Paretian condition that an alternative is equivalent to another
when all individuals are indifferent between them. This excludes using
non-welfarist information about alternatives, but does not exclude
using non-welfarist information about individuals (one individual may
be favored because of a physical handicap). The second one is an
independence condition formulated in terms of utilities. It may be
called Independence of Irrelevant Utilities (Hammond 1987), and says
that the social ranking of any pair of alternatives must depend only
on utility levels at these two alternatives, so that a change in the
profile of utility functions which would leave the utility levels
unchanged at the two alternatives should not alter how they are
ranked. This excludes using non-welfarist information about
individuals, but does not exclude using non-welfarist information
about alternatives (one may be preferred because it has more
freedom). The combination of the two conditions excludes all non-welfare
information. Excellent surveys are made in d'Aspremont (1985),
d'Aspremont and Gevers (2002), Bossert and Weymark (2004), Mongin and
d'Aspremont (1998). In spite of the important clarification progress
made by this literature, the introduction of utility functions
essentially amounts to going back to old welfare economics, after the
failures of new welfare economics, Bergson, Samuelson and Arrow to
provide appealing solutions with data on consumer tastes only.

A related issue is how the evaluation of individual well-being must be
made, or, equivalently, how interpersonal comparisons must be
performed. Welfare economics traditionally relied on “utility”, and
the extended informational basis of social choice is mostly formulated
with utilities (although the use of extended preference orderings is
often shown to be formally equivalent: for instance, saying that Jones
is better-off than Smith is equivalent to saying that it is better to
be Jones than to be Smith, in some social state). But utility
functions may be given a variety of substantial interpretations, so
that the same formalism may be used to discuss interpersonal
comparisons of resources, opportunities, capabilities and the like. In
other words, one may separate two issues: 1) whether one needs more
information than individual preference orderings in order to perform
interpersonal comparisons; 2) what kind of additional information is
ethically relevant (subjective utility or objective notions of
opportunities, etc.). The latter issue is directly related to
philosophical discussions about how well-being should be conceived and
to the “equality of what” debate.

The former issue is still debated. Extending the informational basis
by introducing numerical indices of well-being (or equivalent extended
orderings) is not the only conceivable extension. Arrow's
impossibility is obtained with the condition of Independence of
Irrelevant Alternatives, which may be logically analyzed, when the
theorem is reformulated with utility functions as primitive data, as
the combination of Independence of Irrelevant Utilities (defined
above) with a condition of ordinal non-comparability, saying that the
ranking of two alternatives must depend only on individuals' ordinal
non-comparable preferences. Arrow's impossibility may be avoided by
relaxing the ordinal non-comparability condition, and this is the
above-described extension of the informational basis by relying on
utility functions. But Arrow's impossibility may also be avoided by
relaxing Independence of Irrelevant Utilities only. In particular, it
makes sense to rank alternatives on the basis of how these
alternatives are considered by individuals in comparison to other
alternatives. For instance, when considering to make a transfer of
consumption goods from Jones to Smith, it is not enough to know that
Jones is against it and Smith is in favor of it (this is the only
information usable under Arrow's condition). It is also relevant to
know if both consider that Jones has a better bundle, or not, which
involves considering other alternatives in which bundles are permuted,
for instance. In this vein, Hansson (1973) and Pazner (1979) have
proposed to weaken Arrow's axiom so as to make the ranking of two
alternatives depend on the indifference curves of individuals at these
two alternatives. In particular, Pazner relates this approach to
Samuelson's (Samuelson 1977), and concludes that the Bergson-Samuelson
social welfare function can indeed be constructed consistently in this
way. Interpersonal comparisons may be sensibly made on the sole basis
of indifference curves and therefore on the sole basis of ordinal
non-comparable preferences. This requires broadening the concept of
interpersonal comparisons in order to cover all kinds of comparisons,
not just utility comparisons (see Fleurbaey and Hammond 2004).

The concept of informational basis itself need not be limited to
issues of interpersonal comparisons. Many conditions of equity,
efficiency, separability, responsibility, etc. bear on the kind and
quantity of information that is deemed relevant for the ranking of
alternatives. The theory of social choice gives a convenient framework
for a rigorous analysis of this issue.

The theory of social choice with utility functions has greatly
systematized our understanding of social welfare functions. For
instance, it has shown how to construct a continuum of intermediate
social welfare functions between sum-utilitarianism and the maximin
criterion (or its lexicographic refinement, the leximin criterion,
which ranks distributions of well-being by examining first the
worst-off position, then the position which is just above the
worst-off, and so on; for instance, the maximin is indifferent between
the three distributions (1,2,5), (1,3,5) and (1,3,6), whereas the
leximin ranks them in increasing order). Three other developments
around utilitarian social welfare functions are worth mentioning.

The first development is related to the application of theories of
equality of opportunity, and involves the construction of mixed social
welfare functions which combine utilitarianism and maximin. Suppose
that there is a double partition of the population, such that one
would like the social welfare function to display infinite inequality
aversion within subgroups of the first partition, and zero inequality
aversion within subgroups of the second partition. For instance,
subgroups of the first partition consist of equally deserving
individuals, for which one would like to obtain equality of outcomes,
whereas subgroups of the second partition consist of individuals who
have equal opportunities, so that inequalities among them do not
matter. Van de gaer (1993) proposes to apply average utilitarianism
within each subgroup of the second partition, and to apply the maximin
criterion to the vector of average utilities obtained in this way. In
other words, the average utilities measure the value of the
opportunity sets offered to individuals, and one applies the maximin
criterion to such values, in order to equalize the value of
opportunity sets. Roemer (1998) proposes to apply the maximin
criterion within each subgroup of the first partition, and then to
apply average utilitarianism to vector of minimum utilities obtained
in this way. In other words, one tries to equalize outcomes for
equally deserving individuals first, and then applies a utilitarian
calculus. These may not be the only possible combinations of
utilitarianism and maximin, but they are given an axiomatic
justification which suggests that they are indeed salient, in Ooghe,
Schokkaert and Van de gaer (2007) and Fleurbaey (2008). For a survey on the applications of
Roemer's criterion, see Roemer (2002b).

Another interesting development deals with intergenerational
ethics. With an infinite horizon, it is essentially impossible to
combine the Pareto criterion and anonymity (permuting the utilities of
some generations does not change social welfare) in a fully
satisfactory way, even when utilities are perfectly comparable. This
is a similar but more basic impossibility than Arrow's theorem. The
intuition of the problem can be given with the following simple
example. Consider the following sequence of utilities:
(1,2,1,2,…). Permute the utility of every odd period with the
next one. One then obtains (2,1,2,1,…). Then permute the
utility of every even period with the next one. This yields
(2,2,1,2,…). This third sequence Pareto-dominates the first
one, even though it was obtained only through simple
permutations. This impossibility is now better understood, and various
results point to the “catching up” criterion as the most reasonable
extension of sum-utilitarianism to the infinite horizon setting. This
criterion, which does not rank all alternatives, applies when the
finite-horizon sums of utilities, for two infinite sequences of
utilities, are ranked in the same way for all finite horizons above
some finite time. Interestingly, this topic has seen parallel and
sometimes independent contributions by economists and philosophers
(see e.g. Lauwers and Liedekerke 1997,
Lauwers and Vallentyne 2003, Roemer and Suzumura 2007).

A third development worth mentioning has to do with population
ethics. Sum-utilitarianism appears to be overly populationist, since
it implies the “repugnant conclusion” (Parfit 1984) that we should aim
for an unhappy but sufficiently large population in preference to a
small and happy one. Conversely, average utilitarianism is
“Malthusian”, preferring a happier population, no matter how small, to
a less happy one, no matter how large. Here again there is an
interesting tension, namely, between accepting all individuals whose
utility is greater than zero, accepting equalization of utilities, and
avoiding the “repugnant conclusion”. This tension is shown in this
way. Start with a given affluent population of any size. Add any
number of individuals with positive but almost zero utilities. This
does not reduce social welfare. Then equalize utilities, which again
does not reduce social welfare. One then obtains, compared to the
initial population, a larger population with lower utilities. One sees
that these lower utilities may be arbitrarily low, if the added
individuals are sufficiently numerous and have sufficiently low
initial utilities, thus yielding the repugnant conclusion (see
Arrhenius 2000). Average utilitarianism
disvalues additional individuals whose utility is below the average,
which is very restrictive for affluent populations. A less restrictive
approach is that of critical-level utilitarianism, which disvalues
only individuals whose utility level is below some fixed, low but
positive threshold. For an extensive overview and a defense of
critical-level utilitarianism, see Blackorby, Bossert and Donaldson
(1997, 2005). See also Broome (2004).

At the time when Arrow declared social choice to be impossible, Nash
(1950) published a possibility theorem for the bargaining problem,
which is the problem of finding an option acceptable to two parties,
among a subset of alternatives. Interestingly, Nash relied on the
axiomatic analysis just like Arrow, so that both can be given credit
for the introduction of this method in normative economics. In the
same decade, a similar contribution was made by Shapley (1953) to the
theory of cooperative games. The development of such approaches has
been impressive since then, but some questioning has emerged regarding
the ethical relevance of this theory to issues of distributive
justice.

Nash (1950) adopted a welfarist framework, in which alternatives are
described only by the utility levels they give to the two parties. His
solution consists in choosing the alternative which, in the feasible
set, maximizes the product of individual utility gains from the
disagreement point (this point is the fallback option when the parties
fail to reach an agreement). This solution is therefore related to a
particular social welfare function which is somehow intermediate
between sum-utilitarianism and the maximin criterion. Contrary to
these, however, it is invariant to independent changes in utility
zeros and scales, which means that it can be applied with utility
functions which are defined only up to an affine transformation (i.e.,
no difference is made between utility function Ui
and utility function ai Ui +
bi), such as Von Neumann-Morgenstern utility
functions. Nash uses this invariance property in his axiomatic
characterization of the solution. He also uses another property, which
holds for any solution maximizing a social welfare function, namely,
that removing non-selected options does not alter the choice.

This particular property is criticized in Kalai and Smorodinsky
(1975), because it makes the solution ignore the relative size of the
sacrifices made by the parties in order to reach a compromise. They
propose another solution, which consists of equalizing the parties'
sacrifice relative to the maximum gain they could expect in the
available set of options. This solution, contrary to Nash's,
guarantees that an enlargement of the set of options that is favorable
to one party never hurts this party in the ultimate selection. It is
very similar to Gauthier's (1986) “minimax relative concession”
solution. Many other solutions to the bargaining problem have been
proposed, but these two are by far the most prominent.

The relevance of bargaining theory to the theory of distributive
justice has been questioned. First, if the disagreement point is
defined, as it probably should, in relation to the relative strength
of parties in a “state of nature”, then the scope for redistributive
solidarity is very limited. One obtains a theory of “justice as mutual
advantage” (Barry 1989, 1995) which is not satisfactory at the bar of
any minimal conception of impartiality or equality. Second, the
welfarist formal framework of the theory of bargaining is poor in
information (Roemer 1986b, 1996). Describing alternatives only in
terms of utility levels makes it impossible to take account of basic
physical features of allocations. For instance, it is impossible to
find out, from utility data alone, which of the alternatives is a
competitive equilibrium with equal shares. As another illustration,
Nash's and Kalai and Smorodinsky's solutions both recommend allocating
an indivisible prize by a fifty-fifty lottery, whether the prize is
symmetric (a one-dollar bill for either party) or asymmetric (a
one-dollar bill if party 1 wins, ten dollars if party 2 wins).

Extensive surveys of bargaining theory can be found in Peters (1992),
Thomson (1999).

The basic theory of bargaining focuses on the two-party case, but it
can readily be extended to the case when a greater number of parties
are at the table. However, when there are more than two parties, it
becomes relevant to consider the possibility for subgroups
(coalitions) to reach separate agreements. Such considerations lead to
the broader theory of cooperative games.

This broader theory is, however, more developed for the relatively
easy case when coalition gains are like money prizes which can be
allocated arbitrarily among coalition members (the “transferable
utility case”). In this case, for the two-party bargaining problem the
Nash and Kalai-Smorodinsky solutions coincide and give equal gains to
the two parties. The Shapley value is a solution which generalizes
this to any number of parties and gives a party the average value of
the marginal contribution that this party brings to all coalitions
which it can join. In other words, it rewards the parties in
proportion to the increase in coalition gain that they bring about by
gathering with others.

Another important concept is the core. This notion generalizes the
idea that no rational party would accept an agreement that is less
favorable than the disagreement point. An allocation of the total
population prize is in the core if the total amount received by any
coalition is at least as great as the prize this coalition could
obtain on its own. Otherwise, obviously, the coalition has an
incentive to “block” the agreement. Interestingly, the Shapley value
is not always in the core, except for “convex games”, that is, games
such that the marginal contribution of a party to a coalition
increases when the coalition is bigger.

The basics of this theory are very well presented in Moulin (1988),
Myerson (1991). Cooperative games are distinguished from
non-cooperative games by the fact that the players can commit to an
agreement, whereas in a non-cooperative game every player always seeks
his interest and never commits to a particular strategy. The central
concept of the theory of non-cooperative games is the Nash equilibrium
(every player chooses his best strategy, taking others' strategies as
given), which has nothing to do with Nash's bargaining solution. It
has been shown, however, that Nash's bargaining solution can be
obtained as the Nash equilibrium of a non-cooperative bargaining game,
in which players make offers alternatively, and accept or reject the
other's offer.

The theory of fair allocation studies the allocation of resources in
economic models. The seminal contribution for this theory is Kolm
(1972), where the criterion of equity as no-envy is extensively
analyzed with the conceptual tools of general equilibrium
theory. Later the theory borrowed the axiomatic method from bargaining
theory, and it now covers a great variety of economic models and
encompasses a variety of fairness concepts.

There are several surveys of this theory: Thomson and Varian (1985),
Moulin and Thomson (1997), Maniquet (1999), Thomson (2011).

An allocation is envy-free if no individual would prefer having the
bundle of another. An egalitarian distribution in which everyone has
the same bundle is trivially envy-free, but is generally
Pareto-inefficient, which means that there exist other feasible
allocations that are better for some individuals and worse for none. A
competitive equilibrium with equal shares (i.e., equal budgets) is the
central example of a Pareto-efficient and envy-free allocation. It is
envy-free since all agents have the same budget options, so that
everyone could buy everyone's bundle. It is Pareto-efficient because,
by an important theorem of welfare economics, any perfectly
competitive equilibrium is Pareto-efficient (in absence of asymmetric
information, externalities, public goods).

This concept of equity does not need any other information than
individual ordinal preferences. It is not welfarist, in the sense that
from utility data alone it is impossible to distinguish an envy-free
allocation from an allocation with envy. Moreover, an envy-free
allocation may be Pareto-indifferent (everyone is indifferent) to
another allocation that has envy. On the other hand, this concept is
strongly egalitarian, and it is quite natural to view it as capturing
the idea of equality of resources (Dworkin 2000). When resources are
multi-dimensional, for instance when there are several consumption
goods, and when individual preferences are heterogeneous, it is not
obvious to define equality of resources, but the no-envy criterion
seems the best concept for this purpose. It guarantees that no
individual will consider that another has a better bundle than his.
It has been shown by Varian (1976) that, if preferences are
sufficiently diverse and numerous (a continuum), then the competitive
equilibrium with equal shares is the only Pareto-efficient and
envy-free allocation.

This concept can also be related to the idea of equality of
opportunities (Kolm 1996). An allocation is envy-free if and only if
the bundles granted to everyone could have been chosen by each
individual in the same opportunity set, such as, for instance, the set
containing all the bundles of the allocation under
consideration. Along this vein, the concept of no-envy can also be
shown to have a close connection with incentive considerations. A
no-envy test is used in the theory of optimal taxation in order to
make sure that no one would have interest to lie about one's
preferences (Boadway and Keen 2000). Consider the condition that,
when an allocation is selected and some individuals' preferences
change so that their bundle goes up in their own preference ranking,
then the selected allocation is still acceptable. A particular version
of this condition plays a central role in the theory of incentives,
under the name of Maskin monotonicity (see e.g. Jackson 2001), but it
can also be given an ethical meaning, in terms of neutrality with
respect to changes in preferences. Notice that envy-free allocations
satisfy this condition, since after such a change of preferences every
individual's bundle goes up in his ranking, thereby precluding any
appearance of envy. Conversely, it turns out that this condition
implies that the selected allocation must be envy-free, under the
additional assumption that, in any selected allocation, individuals
with identical preferences must have equivalent bundles. If one also requires the selection to be
Pareto-efficient, then one obtains a characterization of the
competitive equilibrium with equal shares (Gevers 1986).

Kolm's (1972) seminal monograph focused on the simple problem of
distributing a bundle of non-produced commodities, and on equity as
no-envy. Other economic problems, and other fairness concepts, have
been studied later. Here is a non-exhaustive list of other economic
problems that have been analyzed: sharing labor and consumption in the
production of a consumption good; producing a public good and
allocating the contribution burden among individuals; distributing
indivisible commodities, with or without the possibility of making
monetary compensations; matching pairs of individuals (men-women,
employers-workers…); distributing compensations for
differential needs; rationing on the basis of claims; distributing a
divisible commodity when preferences are satiable. In the main stream
of this theory, the problem is to select a good subset of allocations
under perfect knowledge of the characteristics of the population and
of the feasible set. There is also a branch which studies cost and
surplus sharing, when the only information available are the
quantities demanded or contributed by the population, and the cost or
surplus may be distributed as a function of these quantities only (see
Moulin 2002). The relevance of this literature for political
philosophers should not be underestimated. Even models which seem to
be devoted to narrow microeconomic allocation problems may turn out to
be quite relevant, and some models are addressing issues already
salient in political philosophy. This is the case in particular for
the model of production of a private good when individuals have
unequal skills, which is a rough description of a market economy, and
for the model of differential needs. Both models are especially
relevant to analyze the issue of responsibility, talent and handicap,
which is now prominent in egalitarian theories of justice. A survey on
these two models in made in Fleurbaey and Maniquet (2011a), and a
monograph connecting the various relevant fields of economic analysis to
theories of responsibility-sensitive egalitarianism is in Fleurbaey
(2008).

Among the other concepts of fairness which have been introduced, two
families are important. The first family contains principles of
solidarity, which require individuals to be affected in the same way
(they all gain or all lose) by some external shock (change in
resources, technology, population size, population characteristics).
For instance, if resources or technology improve, then it is natural
to hope that everyone will benefit. The second family contains welfare
bounds, which provide guarantees to everyone against extreme
inequality. For instance, in the division of non-produced commodities,
it is very natural to require that nobody should be worse-off than at
the equal-split allocation (i.e. the allocation in which everyone gets
the per capita amount of resources).

Let us briefly describe some of the insights that are gained through
this theory and seem relevant to political philosophy. A very
important one is that there is a conflict between no-envy and
solidarity (Moulin and Thomson 1988, 1997). This conflict is well
illustrated by the fact that in a market economy, typically any change
in technology benefits some agents and hurts others, even when the
change is a pure progress which could benefit all. Solidarity
principles are not obeyed by allocation rules which pass the no-envy
test, and these principles point toward a different kind of
distribution, named “egalitarian-equivalence” by Pazner and Schmeidler
(1978). An allocation is egalitarian-equivalent when everyone is
indifferent between his bundle in this allocation and the bundle he
would have in an egalitarian economy defined in some simple way. For
instance, the egalitarian economy may be such that everyone has the
same bundle. In this case, an egalitarian-equivalent allocation is
such that everyone is indifferent between his bundle and one
particular bundle. In more sophisticated versions, the egalitarian
economy is such that everyone has the same budget set, in some
particular family of budget sets. Egalitarian-equivalence is a serious
alternative to no-envy for the definition of equality of resources,
and its superiority in terms of solidarity is quite significant, in
relation to the next point.

The second insight, indeed, is that no-envy itself is a combination of
conflicting principles (Fleurbaey and Maniquet 2011a, Fleurbaey 2008). This conflict is made apparent in models with
talents and handicaps. For instance, Pazner and Schmeidler (1974)
found out that there may not exist envy-free and Pareto-efficient
allocations in the context of production with unequal skills (when
there are high-skilled individuals who are strongly averse to
labor). This results from an
incompatibility between a compensation principle saying that
individuals with identical preferences should have equivalent bundles
(suppressing inequalities due to skills), and a reward principle
saying that individuals with the same skills should not envy each
other (no preferential treatment on the basis of different
preferences). Both principles are a logical implication of the no-envy
test. This is obvious for the latter. For the former, notice that
no-envy among individuals with the same preferences means that they
must have bundles on the same indifference curve. Interestingly, the
compensation principle is a logical consequence of solidarity
principles and is therefore perfectly compatible with them. It is very well satisfied by
egalitarian-equivalent allocation rules. In contrast, it is violated
by Dworkin's hypothetical insurance which applies the no-envy test
behind a veil of ignorance (see Dworkin 2000, Fleurbaey 2008, and
§ 3.2).

The theory of fair allocations contains many positive results about
the existence of fair allocations, for various fairness concepts, and
this stands in contrast to Arrow's impossibility theorem in the theory
of social choice. The difference between the two theories has often
been interpreted as due to the fact that they perform different
exercises (Sen 1986, Moulin and Thomson 1997). The theory of social
choice, it is said, seeks a ranking of all options, while the theory
of fair allocation focuses on the selection of a subset of
allocations. This explanation is not convincing, since selecting a
subset of fair allocations is formally equivalent to defining a
full-blown albeit coarse ranking, with “good” and “bad” allocations. A
more convincing explanation lies in the fact that the information used
in fairness criteria is richer than allowed by Arrow's Independence of
Irrelevant Alternatives (Fleurbaey, Suzumura and Tadenuma 2002). For
instance, in order to check that an allocation is envy-free while
another displays envy, it is not enough to know how individuals rank
these two allocations in their preferences. One must know individual
preferences over other alternatives involving permutations of bundles
(an envious individual would prefer an allocation in which his bundle
is permuted with one he envies). In this vein, one discovers that it
is possible to extend the theory of fair allocation so as to construct
fine-grained rankings of all allocations. This is very useful for the
discussion of public policies in “second-best” settings, that is, in
settings where incentive constraints make it impossible to reach
Pareto-efficiency. With this extension, the theory of fair allocation
can be connected to the theory of optimal taxation (Maniquet 2007), and becomes even more relevant to the political philosophy
of redistributive institutions (Fleurbaey 2007). It turns out that
the egalitarian-equivalence approach is very convenient for the
definition of fine-grained orderings of allocations, which provides an
additional argument in its favor. A detailed study of fair social orderings is made in Fleurbaey and Maniquet (2011b).

Sen (1970b) and Gibbard (1974) propose, within the framework of social
choice, paradoxes showing that it may not be easy to rank alternatives
when some individuals have a special right to rank some alternatives
that differ only in matters belonging to their private sphere, and
when their preferences are sensitive to what happens in other
individuals' private sphere. For instance, as an illustration of
Gibbard's paradox, individuals have the right to choose the color of
their shirt, but, in terms of social ranking, should A and B wear the
same color or different colors, when A wants to imitate B and B wants
to have a different color? There is a huge literature on this topic,
and after Gaertner, Pattanaik and Suzumura (1992), who argue that no
matter what choice A and B make, their rights to choose their own
shirt is respected, a good part of it examines how to describe rights
properly. The framework of game forms is an interesting alternative to
the social choice model. Recent surveys can be found in Arrow, Sen and
Suzumura (1997, vol. 2).

Apart from this formal analysis of rights, economic theory is not very
well connected to libertarian philosophy, since economic models show
that, apart from the very specific context of perfect competition with
complete markets, perfect information, no externalities and no public
goods, the laisser-faire allocation is typically inefficient and
arbitrarily unequal. Therefore libertarian philosophers do not find
much help or inspiration in economic theory, and there is little
cross-fertilization in this area.

The capability approach, developed in Sen (1985, 1992), is a particular
response to the “equality of what” debate, and is presented by Sen as the best way
to think about the relevant interpersonal comparisons to be made for evaluations
social situations at the bar of distributive justice. It
is often presented as intermediate between resourcist and welfarist approaches,
but it is perhaps accurate to present it as more general. A “functioning”
is any doing or being in the life of an individual. A “capability set” is the
set of functioning vectors that an individual has access to. This approach has attracted a lot of interest
in particular because it makes it possible to take into account all the
relevant dimensions of life, in contrast with the resourcist and welfarist
approaches which can be criticized as too narrow.

Being so general, the approach needs to be specified in order to inspire
original applications. The body of empirical literature that takes inspiration
from the capability approach is now numerically impressive. As noted in
Robeyns (2006) and Schokkaert (2007b), in many cases the empirical studies
are essentially similar, but for terminology, to the sociological studies
of living conditions. But there are more original applications, e.g., when
an evaluation of development programs that takes account of capabilities
is contrasted with cost-benefit analysis (Alkire 2002) or when a list of
basic capabilities is enshrined in a theory of what a just society should
provide to all citizens (Nussbaum 2000). More generally, all studies which
seek to incorporate multiple dimensions of quality of life into the
evaluation of individual and social situations can be considered, broadly
speaking, as pertaining to this approach.

Two central questions pervade the empirical applications. The first
concerns the distinction between capabilities and functionings. The
latter are easier to observe because individual achievements are more
accessible to the statistician than pure potentialities. There is also
the normative issue of whether the evaluation of individual situations
should be based on capabilities only, viewed as opportunity sets, or
should take account of achieved functionings as well. The second central
question is the index problem, which has also been raised about Rawls'
theory of primary goods. There are many dimensions of functionings and
capabilities and not all of them are equally valuable. The definition
of a proper system of weights has appeared problematic in connection
to the difficulties of social choice theory.

Recent surveys on this approach and its applications can be found in Basu
and Lopez-Calva (2011), Kuklys (2005), Robeyns (2006), Robeyns and Van der Veen (2007), Schokkaert (2009).

Roemer (1982, 1986c) proposes a renewed economic analysis of Marxian
concepts, in particular exploitation. He shows that, even if the
theory of labor value is flawed as a causal theory of prices, it may
be consistently used in order to measure exploitation and analyze the
correlation between exploitation and the class status of
individuals. However, he considers that this concept of exploitation
is ethically not very appealing, since it roughly amounts to requiring
individual consumption to be proportional to labor, and he suggests a
different definition of exploitation, in terms of undue advantage due
to unequal distribution of some assets. This leads him eventually to
merge this line of analysis with the general stream of egalitarian
theories of justice. The idea that consumption should be proportional
to labor has also received some attention in the theory of fair
allocation (Moulin 1990, Roemer & Silvestre 1993). See Roemer
(1986a) for a collection of philosophical and economic essays on
Marxism.

In normative economics, theorists have often been wary of relying on
concepts which are disconnected from the layman's intuition.
Questionnaire surveys, usually performed among students, have indeed
given some disturbing results. Welfarist approaches have been
questioned by the results of Yaari and Bar Hillel (1984), the
Pigou-Dalton principle has been critically scrutinized by Amiel and
Cowell (1992), the principles of compensation and reward have obtained
mixed support in Schokkaert and Devooght (1998), etc. It is of course
debatable how much theorists can learn from such results (Bossert
1998).

Surveys of this questionnaire approach are available in Schokkaert and
Overlaet (1989), Amiel and Cowell (1999), Schokkaert
(1999), Gaertner and Schokkaert (2011). Philosophers have also performed similar inquiries (Miller
1992).

It is standard in normative economics, as in political philosophy, to
evaluate individual well-being on the basis of self-centered
preferences, utility or advantage. Feelings of altruism, jealousy,
etc. are ignored in order not to make the allocation of resources
depend on the contingent distribution of benevolent and malevolent
feelings among the population (see e.g. Goodin 1986, Harsanyi
1982). It may be worth mentioning here that the no-envy criterion
discussed above has nothing to do with interpersonal feelings, since
it is defined only with self-centered preferences. When an individual
“envies” another in this particular sense, he simply prefer the
other's consumption to his own, but no feeling is involved (he might
even not be aware of the existence of the other individual).

But positive economics is quite relevantly interested in studying the
impact of individual feelings on behavior. Homo œconomicus may
be rational without being narrowly focused on his own consumption. The
analysis of labor relations, strategic interactions, transfers within
the family, generous gifts require a more complex picture of human
relations (Fehr and Fischbacher 2002). Reciprocity, in particular,
seems to be a powerful source of motivation, leading individuals to
incur substantial costs in order to reward nice partners and punish
faulty partners (Fehr and Gachter 2000). For an extensive survey of
this branch of the economic literature, see Gérard-Varet, Kolm
and Mercier-Ythier (2004).

The literature on happiness has surged in the last decade. The
findings are well summarized in many surveys (see in particular Diener
(1994, 2000), Diener et al. (1999), Frey and Stutzer (2002), Graham (2009), Kahneman
et al. (1999), Kahneman and Krueger (2006), Layard (2005), Oswald
(1997), Van Praag and Ferrer-i-Carbonell 2008), and reveal the main
factors of happiness: personal temperament, health, social connections
(in particular being married and employed). The impact of
material wealth is debated, some arguing that it is more a matter of relative
position than of absolute comfort, at least above a minimal level of
affluence (Easterlin 1995, Clark et al. 2008), others arguing that there is a positive (but logarithmic: doubling income induces a constant increment on happiness) impact over the whole range of observed living standards (Deaton 2008, Sacks et al. 2010) .

A hotly debated question is what to make of this approach in welfare
economics. There is wide variety of positions, from those who propose
to measure and maximize national happiness (Diener 2000, Kahneman et
al. 2004, Layard 2005) to those who firmly oppose this idea on various
grounds (Burchardt 2006, Nussbaum 2008, among others). There seems to
be a consensus on the idea that happiness studies suggest a welcome
shift of focus, in social evaluation, from purely materialistic
performances to a broader set of values. Above all, one can consider
that the traditional suspicion among economists about the possibility
to measure subjective well-being is being assuaged by the recent
progress.

However, the fact that subjective well-being can be measured does not
imply that it ought to be taken as the metric of social
evaluation. Surprisingly, the literature on happiness refers very
little to the lively philosophical debates of the previous decades
about welfarism, and in particular the criticisms raised by Rawls
(1982) and Sen (1985) against utilitarianism. (Two exceptions are
Burchardt (2006) and Schokkaert (2007). Layard (2005) also mentions
and quickly rebuts some of the arguments against welfarism.)
Nonetheless, one of the key elements of that earlier debate, namely,
the fact that subjective adaptation is likely to hide objective
inequalities, shows up in the data, challenging happiness specialists.
Subjective well-being seems relatively immune in the long run to many
aspects of objective circumstances, individuals displaying a
remarkable ability to adapt. After most important life events,
satisfaction returns to its usual level and the various affects return
to their usual frequency. If subjective well-being is not so sensitive
to objective circumstances, should we stop caring about inequalities,
safety, and productivity?

The SEP would like to congratulate the National Endowment for the Humanities on its 50th anniversary and express our indebtedness for the five generous grants it awarded our project from 1997 to 2007.
Readers who have benefited from the SEP are encouraged to examine the NEH’s anniversary page and, if inspired to do so, send a testimonial to neh50@neh.gov.